Master your credit card, or it will destroy your finances

DON’T fool yourself: a credit card equals debt. “When you use a credit card, it feels so easy, until you get hit by your debt spiralling out of control,” says Wikus Olivier, a debt management expert at DebtSafe debt counsellors.

Olivier says you need to ask yourself why you actually want to use a credit card. A few swipes of this underestimated weapon can leave you bewildered at how you’ve managed to get your finances stuck in the red, he says.

With interest rates on most credit card debt at about 21%, a credit card is very “expensive” debt.

Olivier says that if you have a credit card and are convinced that you need it, there are a few do’s and don’ts that will help you to manage your swipes and limit the amount of debt that you accumulate.

DO’S

• Draw up a proper financial plan so that you know how much you can reasonably spend on the card.

• If you want to use your credit card to earn loyalty benefits, use it like a debit card. Do not allow your account to fall into credit, but maintain a positive balance. You’ll earn some interest on a positive balance.

• Try to pay more than your minimum payment each month, to ensure you don’t only cover the “rent” on what you owe. The best thing to do is to pay off the full amount each month as it becomes due.

• If the credit agreement is not disclosed, ask for it and make sure that you understand it. For example: What is your minimum payment? What interest rate will apply and what are the other fees and charges? You need to know all the terms and conditions.

• Save your credit card for emergency situations. Many consumers do not have the excess cash flow to build a proper emergency fund. A credit card can be handy in situations like these.

DON’TS

• Don’t just swipe your card left, right and centre. It is way too easy and can cause major confusion on what is happening to your credit score. Relying too much on your credit card shows a lack of financial planning and can negatively affect your ability to access other credit, such as a home loan and vehicle financing.

• Although a credit card may get you excited because of the loyalty rewards or points that come your way, consider your financial stability. A healthy bank account means more than how much loyalty rewards you accumulate. Loyalty programmes are nothing more than incentive schemes from the banks to get you to spend more on your credit card so that they can earn interest on your debt.

• Don’t miss or skip a payment – there are extra fees involved, and your credit score can take a knock.

• Do not exceed your credit limit (or, in more popular terms “max out” your card), because you’ll have to pay a penalty fee. Once a credit card is maxed out, it is very difficult to bring the balance down. It will take months of effort to bring your credit card balance down to zero.

• Don’t use your credit card when you want to withdraw cash from an ATM; use your debit card instead.

On using credit cards and spending generally, Olivier says: “Get ‘involved’ with your finances and know what is going on, all the time, as confusion (and panic) tends to creep in when your financial situation is out of reach and when you least expect it.”